Eagle Point Credit Company Inc. (NYSE:ECC) Q3 2019 Earnings Conference Call - Final Transcript

Nov 19, 2019 • 10:00 am ET




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Q & A

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Mickey Schleien with Ladenburg Thalmann. Please proceed with your question.

Mickey M. Schleien

Yes, good morning, Tom and Ken. I'm going to ask you to indulge me a little, because my first question is a little long-winded. But I'd like to start off by asking about the quality of the collateral. Your presentation shows that revenues and EBITDA growth have slowed sharply for borrowers in general and we now have almost 30% of leveraged loans rated B minus or B3. So there is this persistent concern in the market that these ratings on these loans could decline even without a recession because a lot of that trend has been due to aggressive acquisition strategies or perhaps poor deal terms or maybe business models that aren't working very well. Since CLOs own over half of all leveraged loans, obviously that trend could put the typical 7.5% triple C test at risk, and I do see that your portfolios are already at 6% in Triple C as of October. That compares to 4.9% at the beginning of the year.

So I'd like to ask you what is the sensitivity of the portfolios, cash flows and your NAV to this test being broken.

Thomas P. Majewski

Good question. So you hit on a couple of points there. Probably the first number, let me draw everyone's attention to is on page 26 of the investor presentation which lays out a number of metrics, but among them, the weighted average overcollateralization ratio, junior OC cushion, the fifth column from the right, you'll see that's 4.33%. So as we look at CLOs, and obviously that's an average, some are higher, some are lower, but most of -- the vast majority are clustered right around the average.

What happens in a CLO if there were to be an increase in triple Cs over 7.5% is, there would be a reduction in the numerator of the OC test, such that, and while every transaction varies slightly, broadly, how I would encourage you to think of it is, the lowest price Triple Cs get a reduced carrying value in the numerator of the OC test.

So if you have, let's take some examples, if you had 10% Triple Cs and they were all trading at $0.60 on the dollar, let's say, you would take a 40% haircut on 2.5% of your triple Cs. So to do my math, that would be 1%, I guess reduction in the numerator side of the OC tests, which would reduce that 4.33% if that happen uniformly across all CLOs to 3.33%. So we could sustain a non-trivial increase in triple Cs, holding all else constant without necessarily impacting the current cash flows on the weighted average of our portfolio.

Now what I -- when I said though and there is one thing that's holding all things constant and that's obviously highly simplifying assumption. There is two things to highlight around